STOCK-BASED COMPENSATION

The Company currently has two active plans, the Fifth Amended and Restated LendingTree 2008 Stock and Annual Incentive Plan (the "Equity Award Plan") and the LendingTree 2017 Inducement Grant Plan (the "Inducement Plan"), under which future awards may be granted, which currently covers outstanding stock options to acquire shares of the Company's common stock, restricted stock, RSUs and RSUs with performance conditions, and provides for the future grants of these and other equity awards. Under the Equity Award Plan and the Inducement Plan, the Company is authorized to grant stock options, restricted stock, RSUs and other equity-based awards for up to 5.35 million and 0.5 million shares, respectively, of LendingTree common stock to employees, and, under the Equity Award Plan only, to non-employee consultants and directors.

The Equity Award Plan and Inducement Plan each have a stated term of ten years and provide that the exercise price of stock options granted will not be less than the market price of the common stock on the grant date. The Equity Award Plan and Inducement Plan do not specify grant dates or vesting schedules, as those determinations are delegated to the Compensation Committee of the board of directors. Each grant agreement reflects the vesting schedule for that particular grant, as determined by the Compensation Committee. The Compensation Committee has the authority to modify the vesting provisions of an award.

Non-cash compensation related to equity awards is included in the following line items in the accompanying consolidated statements of operations and comprehensive income (in thousands):



	Year Ended December 31,
	2017		2016		2015
Cost of revenue	$	175	$	129	$	95
Selling and marketing expense	3,973		2,722		1,597
General and administrative expense	16,874		4,699		5,120
Product development	2,339		2,097		1,558
Restructuring and severance	—		—		138
Total non-cash compensation	$	23,361	$	9,647	$	8,508

For the years ended December 31, 2017, 2016 and 2015, the Company recognized $9.5 million, $3.7 million and $3.0 million of income tax benefit related to non-cash compensation. Additionally, for the year ended December 31, 2017, the Company recognized $12.9 million of excess tax benefit, including state taxes, in income tax expense. See Note 2—Significant Accounting Policies—Recent Accounting Pronouncements, for additional information regarding excess tax benefits and deficiencies.

Stock Options

A summary of the changes in outstanding stock options is as follows:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value^(a)
			(per option)		(in years)	(in thousands)
Outstanding at December 31, 2016	1,991,802		$	21.23
Granted	112,059		207.79
Exercised	(219,094	)	31.29
Forfeited	(21,028	)	70.90
Expired	—		—
Outstanding at December 31, 2017	1,863,739		$	30.70	4.46	$	577,295
Options exercisable	1,036,757		$	11.56	2.34	$	340,976

(a)

The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company's closing stock price of $340.45 on the last trading day of 2017 and the exercise price, multiplied by the number of shares covered by in-the-money options) that would have been received by the option holder had the option holder exercised these options on December 31, 2017. The intrinsic value changes based on the market value of the Company's common stock.

As of December 31, 2017, there was approximately $12.1 million of unrecognized compensation cost related to stock options. These costs are expected to be recognized over a weighted-average period of approximately 0.6 years.

Upon exercise, the intrinsic value represents the pre-tax difference between the Company's closing stock price on the exercise date and the exercise price, multiplied by the number of stock options exercised. During the years ended December 31, 2017, 2016 and 2015, the total intrinsic value of stock options that were exercised was $27.7 million, $0.3 million and $5.9 million, respectively. Cash received from stock option exercises and the related actual tax benefit realized were $6.9 million and $11.3 million, respectively, for the year ended December 31, 2017.

During the years ended December 31, 2017, 2016 and 2015, the Company granted stock options with a weighted average grant date fair value per share of $105.15 , $40.05, and $27.60, respectively, of which the vesting periods include (a) immediately upon grant, (b) five months from the grant date, (c) one year from the grant date, (d) 50% over a period of two years from the grant date, (e) 25% and 75% over a period of 1.7 years and 2.7 years, respectively, (f) 33% over a period of three years from the grant date, (g) 25% and 75% over a period of two years and three years, respectively, (h) four years from the grant date and (i) 25% over a period of four years from the grant date.

For purposes of determining stock-based compensation expense, the weighted average grant date fair value per share of the stock options was estimated using the Black-Scholes option pricing model, which requires the use of various key assumptions. The weighted average assumptions used are as follows:



	Year Ended December 31,
	2017	2016	2015
Expected term ⁽¹⁾	5.00 - 7.00 years	5.22 - 6.38 years	5.21 - 6.23 years
Expected dividend ⁽²⁾	—	—	—
Expected volatility ⁽³⁾	51% - 52%	48% - 53%	38% - 48%
Risk-free interest rate ⁽⁴⁾	1.74% - 2.24%	1.10% - 2.18%	1.65% - 2.01%


(1)	The expected term of stock options granted was calculated using the 'Simplified Method', which utilizes the midpoint between the weighted average time of vesting and the end of the contractual term. This method was utilized for the stock options due to a lack of historical exercise behavior by the Company's employees.


(2)	For all stock options granted during the years ended December 31, 2017, 2016 and 2015, no dividends are expected to be paid over the contractual term of the stock options, resulting in a zero expected dividend rate.


(3)	The expected volatility rate is based on the historical volatility of the Company's common stock.


(4)	The risk-free interest rate is specific to the date of grant. The risk-free interest rate is based on U.S. Treasury yields for notes with comparable expected terms as the awards, in effect at the grant date.

During the years ended December 31, 2017, 2016 and 2015, the total fair value of options vested was $4.1 million, $0.9 million and $0.8 million, respectively.

Stock Options with Performance Conditions

During 2017, the Company granted stock options with performance conditions with a weighted average grant date fair value per share of $152.45, of which vesting periods range from 1.2 years to 2.2 years, pending the attainment of certain performance targets set at the time of grant.

A summary of the changes in outstanding stock options with performance conditions is as follows:



	Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value^(a)
		(per option)		(in years)	(in thousands)
Outstanding at December 31, 2016	—	$	—
Granted	37,877	308.90
Exercised	—	—
Forfeited	—	—
Expired	—	—
Outstanding at December 31, 2017	37,877	$	308.90	9.95	$	1,195
Options exercisable	—	$	—	0.00	$	—

(a)

As of December 31, 2017, there was approximately $2.3 million of unrecognized compensation cost related to stock options with performance conditions. These costs are expected to be recognized over a weighted-average period of approximately 1.6 years.

As of December 31, 2017, the performance conditions associated with the performance-based nonqualified stock options had not been met.



Expected term ⁽¹⁾	5.5 - 6.00 years
Expected dividend ⁽²⁾	—
Expected volatility ⁽³⁾	51%
Risk-free interest rate ⁽⁴⁾	2.16% - 2.23%


(1)	The expected term of stock options granted was calculated using the 'Simplified Method', which utilizes the midpoint between the weighted average time of vesting and the end of the contractual term. This method was utilized for the stock options due to a lack of historical exercise behavior by the Company's employees.


(2)	For all stock options granted during the year ended December 31, 2017, no dividends are expected to be paid over the contractual term of the stock options, resulting in a zero expected dividend rate.


(3)	The expected volatility rate is based on the historical volatility of the Company's common stock.


(4)	The risk-free interest rate is specific to the date of grant. The risk-free interest rate is based on U.S. Treasury yields for notes with comparable expected terms as the awards, in effect at the grant date.

Restricted Stock Units

A summary of the changes in outstanding nonvested RSUs is as follows:



	RSUs
	Number of Units		Weighted Average Grant Date Fair Value
			(per unit)
Nonvested at December 31, 2016	152,374		$	65.64
Granted ^(a)	94,783		152.45
Vested	(78,631	)	57.92
Forfeited	(15,697	)	82.99
Nonvested at December 31, 2017	152,829		$	121.68


(a)	The grant date fair value per share of the RSUs is calculated as the closing market price of LendingTree's common stock at the time of grant.

As of December 31, 2017, there was approximately $13.9 million of unrecognized compensation cost related to RSUs. These costs are expected to be recognized over a weighted-average period of approximately 1.8 years.

The total fair value of RSUs that vested during the years ended December 31, 2017, 2016 and 2015 was $11.5 million, $10.1 million and $11.0 million, respectively.

Restricted Stock

A summary of the changes in outstanding nonvested restricted stock is as follows:



	Restricted Stock
	Number of Shares		Weighted Average Grant Date Fair Value
			(per share)
Nonvested at December 31, 2016	14,464		$	25.14
Granted	—		—
Vested	(14,464	)	25.14
Forfeited	—		—
Nonvested at December 31, 2017	—		$	—

The total fair value of restricted stock that vested during the years ended December 31, 2017, 2016 and 2015 was $2.1 million, $3.9 million and $4.1 million, respectively.

Restricted Stock Units with Performance Conditions

During 2017 and 2016, the Company granted RSUs with performance conditions to certain employees, of which vesting periods range from 0.33 years to 4.00 years, pending the attainment of certain performance targets set at the time of grant.

A summary of the changes in outstanding nonvested RSUs with performance conditions is as follows:



	RSUs with Performance Conditions
	Number of Units		Weighted Average Grant Date Fair Value
			(per unit)
Nonvested at December 31, 2016	44,509		$	88.28
Granted ^(a)	80,880		186.85
Vested	(1,931	)	96.46
Forfeited	(12,253	)	83.60
Nonvested at December 31, 2017	111,205		$	160.34


(a)	The grant date fair value per share of the RSUs with performance conditions is calculated as the closing market price of LendingTree's common stock at the time of grant.

As of December 31, 2017, there was approximately $13.5 million of unrecognized compensation cost related to RSUs with performance conditions. These costs are expected to be recognized over a weighted-average period of approximately 1.7 years.

The total fair value of RSUs with performance conditions that vested during the years ended December 31, 2017 and 2016 was $0.4 million and $0.2 million, respectively.

Chairman and Chief Executive Officer Grants

On July 25, 2017, the Company’s Compensation Committee approved new compensation arrangements for its Chairman and Chief Executive Officer. The new compensation arrangements include the issuance of performance based equity compensation grants with a modeled total grant date value of $87.5 million of which 25% (119,015 shares) would be in the form of time-vested restricted stock awards with a performance condition and 75% (a maximum of 769,376 shares) would be in the form of performance-based nonqualified stock options.

Stock Options with Market Conditions

The performance-based nonqualified stock options have a target number of shares that vest upon achieving targeted total shareholder return performance of 110% stock price appreciation and a maximum number of shares for achieving superior performance up to 167% of the target number of shares. No shares will vest unless 70% of the targeted performance is achieved. Time-based service vesting conditions would also have to be satisfied in order for performance-vested shares to become fully vested and no longer subject to forfeiture. In connection with the new compensation arrangements, on July 26, 2017, an initial grant of performance-based nonqualified stock options with a target number of shares of 402,694 and a maximum number of shares of 672,499 were issued with an exercise price of $183.80, the closing stock price on July 26, 2017. The fair value of the performance-based stock options will be recognized on a straight-line basis through the vest date of September 30, 2022, whether or not any of the total shareholder return targets are met. In the year ended December 31, 2017, the Company recorded $4.8 million in stock-based compensation expense related to these stock options in the consolidated statement of operations and comprehensive income.

The Company's Equity Award Plan imposes a per employee upper annual grant limit of 672,500 shares. As a result, the remaining 58,010 target performance-based nonqualified stock options and potential performance-based restricted stock awards were awarded on January 2, 2018. The form of the awards consisted of 31,336 performance-based nonqualified stock options with a per share exercise price of $340.25, and 26,674 performance-based restricted stock awards, substituting for an equal number of the performance-based options, to compensate for the increase in the exercise price of the performance-based option granted on July 26, 2017. As of December 31, 2017, the Company estimated the fair value of the remaining 58,010 target shares using a Monte Carlo simulation model and the Company's common stock price on December 31, 2017 to record mark-to-market expense associated with the commitment to issue the shares on January 2, 2018. In the year ended December 31, 2017, the Company recorded $1.0 million in stock-based compensation expense related to these stock options based on the current estimated fair value on a straight-line basis.

As of December 31, 2017, performance-based nonqualified stock options of 167,742 and performance-based restricted stock awards of 10,309 had been earned, which have a vest date of September 30, 2022.

A summary of changes in outstanding stock options with market conditions is as follows:



	Number of Options with Market Conditions	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value^(a)
		(per option)		(in years)	(in thousands)
Outstanding at December 31, 2016	—	$	—
Granted^(b)	402,694	183.80
Exercised	—	—
Forfeited	—	—
Expired	—	—
Outstanding at December 31, 2017	402,694	183.80		9.57	$	63,082
Options exercisable	—	$	—	0.00	$	—

(a)


(b)	During 2017, the Company granted stock options with a grant date fair value per share of $142.45, calculated using the Monte Carlo simulation model, which have a vesting date of September 30, 2022.

For purposes of determining stock-based compensation expense, the grant date fair value per share of the stock options was estimated using the Monte Carlo simulation model, which requires the use of various key assumptions. The assumptions used are as follows:



Expected term ⁽¹⁾	7.50 years
Expected dividend ⁽²⁾	—
Expected volatility ⁽³⁾	50%
Risk-free interest rate ⁽⁴⁾	2.12%


(1)	The expected term of stock options with a market condition granted was calculated using the midpoint between the weighted average time of vesting and the end of the contractual term.


(2)	For all stock options with a market condition granted in 2017, no dividends are expected to be paid over the contractual term of the stock options, resulting in a zero expected dividend rate.


(3)	The expected volatility rate is based on the historical volatility of the Company's common stock.


(4)	The risk-free interest rate is specific to the date of grant. The risk-free interest rate is based on U.S. Treasury yields for notes with comparable expected terms as the awards, in effect at the grant date.

As of December 31, 2017, there was approximately $52.6 million of unrecognized compensation cost related to stock options with market conditions. These costs are expected to be recognized over a weighted-average period of approximately 4.8 years.

Time-Vested Restricted Stock Awards with Performance Conditions

On January 2, 2018, 119,015 restricted stock awards with time-vesting and a performance condition were granted. The terms of these awards were fixed in the approved new compensation agreements in July 2017. In 2017, the Company recorded $3.1 million in stock-based compensation to reflect the commitment to issue the shares in the consolidated statement of operations and comprehensive income. The performance condition is tied to the Company's operating results during the first six months of 2018. As of December 31, 2017, the performance condition associated with the awards had not been met.